It has been an interesting time for Bitcoin lovers, but right now something big has happened and I don't find many informed news on the internet, so I decided to share my views.
What has happened in the last months:
- 01/08/2017 a new Bitcoin fork takes the name of Bitcoin Cash. It has the same algorithm of Bitcoin, but a different block size and other minor technicalities.
- 01/11/2017 a new Bitcoin fork takes the name of Bitcoin Gold. It has a new mining algorithm and hence it characterize itself as a different currency really.
- 09-10/11/2017 with a great 'coup de theatre' the fork expected for the 16th of November is retired. That would have been probably a very very serious fork.
I received since many messages from friends that asked me what I think about these forks especially for investing purposes, but also because there are many many details and as we all know 'the devil hides himself in details'...
The state of the Network
I think we have to be honest. The state of Bitcoin network is really a mess. The unconfirmed transactions in the mempool were up to 200 thousands two days ago, and now things are slowly, really slowly going back to normal, we are around 80 thousands right now.
This has a lot of importance because the miners choose in the mempool which transactions can be included in a new block, and since they have to pick from a lot of them, doing a transaction would be really expensive, and eventually take days..
To check the size of the mempool you can visit the always very good blockchain.info.
Looking at the hashrate we also discover that miner support for the network has dropped substantially, many miners are now mining Bitcoin Cash and then time to time come back to the Bitcoin network. It is too early to give a diagnostic but things are moving.
Bitcoin cash is gaining equilibrum
What is happening is very simple indeed. Mining difficulty is like the setup of the tariff of mining. Mining costs are fairly constants over time, basically only electricity and amortized cost of buildings etc. The earning from mining depends on the price of the currency of course and on the mining "tariff".
What was happening before
The Bitcoin and Bitcoin Cash "tariffs" were setup every two weeks, but imagine the two currency as two states. One significantly bigger than the second one (the size of the state would be the price). When the "big state" miners (Bitcoin) would find more profitable to mine in the "small state" (Bitcoin Cash) they would literally flood the market. This means in Bitcoin terms that the power of the miners is so high that a block is created much faster than the expected 600s time.
What is happening now
Bitcoin Cash guys understood that by setting the "tarriffs" every 2 weeks (roughly, but not really, since the block times is varying a lot) they were doomed to destroy their currency. Indeed a fixed price can bring to scarcity (the good is so cheep that everyone wants it) or abundance (nobody can afford the good so it remains unsold).
By setting the price every 2 weeks the periods of scarcity were creating blocks every minute and the period of abundance were having problems to create a single block.
Now Bitcoin Cash is adjusting the mining difficulty every block using a simple moving average of the last 144 blocks. Let's see how it works.
Following the Bitcoin ABC team own description:
To compute the difficulty, we begin with the three topmost blocks, and choose the one with the median timestamp of the three. Next, the process is repeated with blocks 144, 145, and 146 (blocks of 144-146 height less than the current) and a median timestamp block is again chosen from those 3.
From these 2 blocks roughly 144 blocks apart, we define W as the amount of work done between the blocks, and T as the elapsed time between the blocks. A high-low filter is applied so that T has maximum value of 2 days and a minimum value of .5 days. This prevents difficulty from changing too abruptly. (Normally 144 blocks takes approximately 1 day).
We can then compute:
Wn = W * ExpectedBlockTime / T .
G = (2^256 / Wn) - 1
This is our difficulty target. Lastly, a final filter is applied to enforce a maximal target.
It seems a very poor algorithm to me, but it could do the trick.
I would have preferred a simple PID feedback that basically just see the difference in the last (say the number you want) 3 or 6 blocks from the target time and apply a simple feedback..
It is really the basis of control theory and you can probably learn more from here: PID controller.
What I don't understand in the algorithm the team implemented is: why we look at the past day, is there something that tell us something about the present? The good thing is that we need a stable output and we know our error from the current value. Eventually a day or so can be used to tune the PID parameters..
Conclusion
I'm sorry I've lost myself in the algorithm detail, maybe there is something I don't see..
Anyway the big thing is that the Bitcoin Cash will adapt a lot to market condition, and if this algorithm is not so poor as it seems it will succeed in being more interesting to mine than Bitcoin. At the beginning the effect in Bitcoin network will be low since, remember, it is a big state with a lot of price that protects him, but in the long run it should be better to mine Bitcoin Cash, and since Bitcoin Cash gives you the same transaction security but with no wait time and lower (almost negligible) fees. Well, conclude yourself what you want...
little caveat: The instability of scarcity and abundance will transfer to the main Bitcoin network, and that would be almost not visible if the price goes up (the higher price will "correct the instability"), but if the price goes down, well, only the Bitcoin Cash adjusting algorithm is protecting Bitcoin then...
another little caveat: And the 51% attack? Well if you have the means this could be the time to give it a try, personally I'm a little short on budget... Could it be the literal "black swan for Bitcoin"?